In
1999 and 2000, DMI sold two forest tenures in Alberta. Alberta’s regulatory
regime imposed upon the licences an obligation to reforest the areas harvested,
a process which generally takes eight to fourteen years. Both sale agreements
provided that the purchasers assumed the obligation to reforest.

In
the years in which DMI harvested timber in accordance with the forest tenures,
it did not claim a tax deduction for the estimated future reforestation
obligations that arose as a result of the harvesting. In the years in which
the sales took place, DMI did not include in its income any amount to reflect
the purchasers’ assumption of the reforestation obligations.

The
Minister of National Revenue reassessed DMI with respect to the 1999 and 2000
taxation years to include amounts equal to the estimated cost of the
reforestation obligations in the “proceeds of disposition” under s. 13(21)
of the Income Tax Act. The Tax Court of Canada allowed DMI’s appeal of
the Minister’s reassessment in part, holding that, upon sale of a forest
tenure, the purchaser’s assumption of reforestation obligations is properly
included in the vendor’s proceeds of disposition under s. 13(21), but that
only a percentage of the estimated cost should have been included. A majority
of the Court of Appeal held that DMI was required to include the entire
estimated cost of the reforestation obligations associated with each tenure in
its proceeds of disposition.

Held:
The appeal should be allowed and the matter should be remitted to the Minister
for reassessment.

DMI
was not required to include the estimated cost of reforestation in its
“proceeds of disposition” for income tax purposes. As a matter of principle,
the assumption of a vendor’s liability by a purchaser may constitute part of
the sale price and, therefore, part of the proceeds of disposition. However,
the reforestation obligation associated with a forest tenure is not a distinct
existing liability that must be included in the proceeds disposition. The
reforestation obligation is embedded in the forest tenure by virtue of Alberta’s
regulatory scheme, which prevents a vendor from selling forest tenures without
also assigning the reforestation obligations. As such, they are simply a
future cost tied to the tenure that depresses the value of the tenure. This is
so irrespective of whether the contracting parties agreed to an estimated
future cost for the reforestation or the vendor estimated the cost of future
reforestation obligations to compute its income for accounting purposes.

DMI’s
argument that the reforestation obligations should not be included in its
proceeds of disposition because they are a “contingent liability” is misplaced
because it implicitly assumes that the reforestation obligations are a distinct
existing liability of the vendor. As an embedded future cost, the reforestation
obligations are properly excluded from proceeds of disposition regardless of
whether they are contingent or absolute.

The
conclusion that a purchaser’s assumption of the reforestation obligations is
not part of the proceeds of disposition avoids the asymmetry inherent in the
Minister’s approach, which would tax the vendor at the time of the sale as if
the reforestation obligations assumed by the purchaser were part of the sale
price, but tax the purchaser as if they were not.

Al Meghji and Monica Biringer, for the intervener the Canadian
Association of Petroleum Producers.

The
judgment of the Court was delivered by

Rothstein J. —

I. Introduction

[1]In this appeal, the Court is called upon to
answer the age-old question: If a tree falls in the forest and you are not
around to replant it, how does it affect your taxes?

[2]Daishowa-Marubeni International Ltd. (“DMI”) was
the owner of forest tenures in Alberta under which it was licensed to cut
timber from designated provincial Crown land. In accordance with Alberta’s
regulatory regime, DMI’s licence to cut timber was subject to a corresponding
obligation to reforest the areas it harvested, in the manner specified by
Alberta regulations. DMI sold two of its forest tenures and, under the terms
of each sale agreement, the purchaser of each tenure assumed the obligation to
reforest that arose from DMI’s past harvesting.

[3]The issue in this case is whether DMI was
required to include in its “proceeds of disposition” for each sale an estimate
of the cost of the reforestation obligations that the purchasers assumed. In
my view, DMI was not required to do so. The obligation to reforest areas
harvested in accordance with a forest tenure in Alberta is a future expense
that is embedded in the tenure. As such, the obligation serves to depress the
value of the forest tenure. It is not a separate existing debt of the vendor
that is assumed by the purchaser as part of the sale price of the forest
tenure.

II. Facts

[4]Prior to 1999, DMI operated two timber divisions
that were referred to throughout these proceedings as the High Level Division
and the Brewster Lumber Division. Both divisions carried on the business of harvesting
logs and manufacturing finished timber. To carry on that business, each
division held a forest tenure that allowed it to cut and remove timber from an
area of land owned by the province of Alberta. The High Level Division’s
forest tenure arose from a Forest Management Agreement that DMI signed with the
province under s. 16 of the Forests Act, R.S.A. 1980, c. F-16, which,
for the purposes of this case, is substantially similar to the Forests Act,
R.S.A. 2000, c. F-22, which is currently in force. The Brewster Lumber
Division’s forest tenure arose from timber quotas issued by the province; see Forests
Act, s. 17.

[5]In addition to permitting DMI’s divisions to cut
and remove timber, the Forest Management Agreement and timber quotas obliged
each division to undertake certain reforestation or silviculture activities
after it harvested the timber, in a manner specified by Alberta regulations.
These reforestation obligations require a tenure holder, over time, to engage
in activities that include brush disposal, scarification, mounding, planting,
seeding, applying herbicides, brushweeding, and manual or chemical tending.
The tenure holder is also required to complete and submit to the province
multiple surveys to demonstrate its progress in reforesting. The tenure holder
is relieved of its obligation to reforest when it satisfies the province that
the reforested area has reached a threshold level of growth, referred to as
“free-to-grow” status. This process generally takes eight to fourteen years.
Alternatively, the province may relieve the holder of its obligation to
reforest if natural processes, such as wildfire or flooding, make it impossible
to achieve the regeneration standard.

[6]In 1999 and 2000, DMI sold its High Level and
Brewster Lumber divisions, along with each division’s forest tenure. With
respect to the High Level Division, DMI entered into a sale agreement with
Tolko Industries Ltd. on October 6, 1999. The agreement provided that Tolko
would pay a purchase price of $169 million for the division, plus an estimated
value of the net purchased working capital. According to the agreement, $20
million of the purchase price was allocated to the value of the High Level
Division’s forest tenure.

[7]The agreement to sell the High Level Division provided
that Tolko would assume the reforestation obligations that had arisen as a
result of DMI’s past harvesting. The agreement stated that “DMI estimates in
good faith that the aggregate value of the current and long term reforestation
liabilities will be $11 million”. It required DMI to prepare a final estimate
of the reforestation obligations after the closing date and provided for the
purchase price to be adjusted in the event that the post-closing estimate of
the reforestation obligations differed from DMI’s original estimate. That is,
if the post-closing estimate was greater than DMI’s initial estimate of $11
million, DMI was required to pay Tolko the difference. If the post-closing
estimate was lower than DMI’s initial estimate, Tolko was required to pay DMI
the difference.

[8]On November 1, 1999, Tolko paid DMI $169
million, plus an additional $16.6 million for net purchased working capital.
After the closing date, DMI tendered a final estimate of the reforestation
obligations that was $296,225 greater than its initial $11 million estimate.
DMI accordingly returned $296,225 to Tolko.

[9]DMI sold the Brewster Lumber Division, including
its forest tenure, to Seehta Forest Products Ltd. on August 11, 2000.
According to the sale agreement, the purchase price for the division was $6.1
million, plus or minus any difference between the preliminary estimate of the
net purchased working capital and a final estimate of the net purchased working
capital. Similar to the High Level agreement, the agreement also provided that
Seehta would assume all obligations to reforest land that was previously
harvested pursuant to Brewster Lumber’s forest tenure. The agreement did not,
however, specify an estimated cost of performing the reforestation obligations.

[10]In accordance with ss. 16(3) and 28(2) of the Forests
Act and The Timber Management Regulations, Alta. Reg. 60/73, s. 154,
DMI sought the province of Alberta’s consent to assign each of the forest
tenures. The province consented to both assignments. The parties are in
agreement that Alberta approves the assignment of a forest tenure only if the
reforestation obligations that arose from the vendor’s harvesting are
undertaken by the purchaser of the tenure. Alberta, an intervener in these
proceedings, takes the position that, upon assignment of a forest tenure, the
vendor is relieved of any liability for completing the reforestation
obligations. Upon assignment, the purchaser is solely responsible for carrying
out the reforestation activities.

[11]In the years in which DMI harvested timber, for accounting
purposes, it charged to earnings the estimated cost of future reforestation
obligations in the year of the harvesting that gave rise to those obligations.
However, each year, for tax purposes, DMI added back to its income the
amounts it had charged to earnings for accounting purposes. Thus, DMI claimed
no tax deduction for the estimated future reforestation obligations that arose
as it harvested timber.

[12]In the years in which the sales took place, DMI
increased its income for accounting purposes by including the amounts charged previously
to earnings, to reflect the fact that it would no longer have to pay the future
reforestation costs associated with the forest tenures it had sold. In filing
its income tax return for those years, DMI did not include in its income any
amount to reflect the purchasers’ assumption of the reforestation obligations.

[13]The Minister of National Revenue reassessed DMI
with respect to both the 1999 and 2000 taxation years. According to the
Minister, DMI was required to include an amount equal to the estimated cost of
the reforestation obligations assumed by Tolko and Seehta in its “proceeds of
disposition” under s. 13(21) of the Income Tax Act, R.S.C. 1985, c. 1
(5th Supp.). The reassessment included in DMI’s proceeds $11 million for the
sale to Tolko, based on the estimated cost of the reforestation obligations in
the sale agreement, and $2,996,380 for the sale to Seehta, based on the
estimated cost in DMI’s accounting records. DMI appealed that reassessment.

[14]The Minister’s reassessment did not account for
the $296,225 that DMI returned to Tolko based on the final estimate of the
future reforestation costs in reassessing DMI for the Tolko sale, but has since
taken the position that that amount should have been included in the
reassessment. Because the actual reassessment was based on the contracting
parties’ initial $11 million estimate, the parties and the courts below have
treated that as the amount in issue for the Tolko sale. I do the same in these
reasons.

III. Procedural History

A. Tax Court of Canada, 2010 TCC 317, 2010 D.T.C. 1216

[15]Miller J. allowed DMI’s appeal of the Minister’s
reassessment in part. He held that, upon sale of a forest tenure, the
purchaser’s assumption of reforestation obligations is properly included in the
vendor’s proceeds of disposition under s. 13(21) of the Act.He
concluded that the assumption of the reforestation obligations was part of the
consideration tendered for the forest tenure. Here, it was evident that the
assumption of the reforestation obligations was part of the consideration
received based on DMI’s admission that “[i]f Tolko had not assumed the
Appellant’s silviculture liability, the amount of cash or other consideration
it would have paid the Appellant would have increased”: A.R., at p. 286.

[16]According to Miller J., however, it was not
appropriate to add the entire estimated cost of the reforestation obligations
to DMI’s proceeds of disposition. After considering a number of factors, Miller
J. concluded that DMI should have included in its proceeds of disposition the
estimated cost of the reforestation activities that would take place within the
12 months following each sale, plus 20 percent of the estimated cost of the
activities that would take place thereafter.

B. Federal Court of Appeal, 2011 FCA 267, 422 N.R. 108

[17]Writing for the majority, Nadon J.A. held that
DMI was required to include in its proceeds of disposition the entire estimated
cost of the reforestation obligations associated with each tenure.

[18]Nadon J.A. agreed with the Tax Court that a
purchaser’s assumption of reforestation obligations amounts to consideration
received by the vendor. According to Nadon J.A., with respect to the
sale of the High Level Division to Tolko, the Tax Court erred by treating the
$11 million cost of the reforestation obligations as an estimate that could be
discounted for tax purposes. The relevant inquiry was the value attributed to
the reforestation obligations by the contracting parties. Here, the sale
agreement demonstrated that DMI and Tolko valued the reforestation obligations
at $11 million and thus that full amount should have been added to DMI’s
proceeds of disposition from the sale.

[19]Nadon J.A. found that the trial judge’s reasons
were inadequate with respect to the sale of the Brewster Lumber Division to
Seehta because the trial judge did not address whether the evidence related to
the transaction showed that DMI and Seehta had agreed to a value for the
reforestation obligations. The majority thus upheld the Minister’s
reassessment with respect to the sale of the High Level Division, but remitted
the matter to the Tax Court for redetermination with respect to the sale of the
Brewster Lumber Division.

[20]Mainville J.A. dissented. In his view, the
reforestation obligations “form an integral part of the forest tenures, and
though they affect the value of the tenures, they are not a separate
consideration of the sale transactions involving the tenures, and should thus
not be added to the vendor’s proceeds of disposition resulting from those
sales”: para. 128.For that reason, he concluded:

The proper
approach in these proceedings is to recognize that the reforestation
liabilities at issue depress the value of the timber resources properties to
which they are inextricably linked, and that consequently the vendor in this
case received a lower price on the sale of these properties than it might have
otherwise received. [para. 130]

[21]On this basis, Mainville J.A. would have allowed
DMI’s appeal and dismissed the government’s cross-appeal.

IV. Issues

[22]This Court granted leave on two issues:

1. Are the reforestation liabilities to
be included in the proceeds of disposition because the vendor is relieved of a
liability or are they integral to and run with the forest tenures?

2. Does it make any difference that the parties
agreed to a specific amount of the future reforestation liability?

V. Analysis

A. Whether the Reforestation Obligations Had to Be Included
in DMI’s Proceeds of Disposition

(1) Whether Reforestation Obligations
Are a Distinct Debt of DMI or Are Embedded in the Forest Tenure

[23]The parties agree that each of the forest
tenures sold in this case is a “timber resource property” within the meaning of
s. 13(21) of the Income Tax Act because each provides “a right or
licence to cut or remove timber from a limit or area in Canada”.

[24]A timber resource property is treated as a
hybrid for tax purposes. On the one hand, it is treated as a capital property
for the purposes of capital cost allowance, such that the owner of a timber
resource property may take an annual deduction on income equal to a percentage
of the undepreciated capital cost; see Income Tax Regulations,C.R.C.
1978, c. 945,Sch. II, Class 33. On the other hand, a timber resource
property is excluded from capital gains treatment: Income Tax Act, s.
39(1)(a)(iv). Therefore, upon sale of a timber resource property, any
proceeds of disposition in excess of the property’s capital cost are treated as
income; see Income Tax Act, s. 13(1) and (21) “undepreciated capital
cost” (variable G); Canada Customs and Revenue Agency, Interpretation Bulletin
IT-481 (Consolidated), “Timber Resource Property and Timber Limits” (Jan. 13,
2004), at para. 2.

[25]As set forth above, the issue in this appeal is
whether the owner of a forest tenure who sells the tenure must include the
estimated amount of future reforestation costs assumed by the purchaser in its
proceeds of disposition. Section 13(21) of the Income Tax Actdefines
“proceeds of disposition” to include “the sale price of property that has been
sold”. The focus of this case is thus on whether the purchasers’ assumption of
the reforestation obligations arising from DMI’s previous harvesting is
included in the sale price of the forest tenure.

[26]It is beyond dispute that, as a matter of
principle, the assumption of a vendor’s liability by a purchaser may constitute
part of the sale price and therefore part of the vendor’s proceeds of disposition;
see, e.g., Telus Communications (Edmonton) Inc. v. Minister of National
Revenue, 2009 FCA 49, 386 N.R. 354, at para. 28; Loyens v. The Queen,
2003 TCC 214, 2003 D.T.C. 355 (General Procedure), at paras. 31 and 33. A
straightforward example of such a circumstance would be the purchase of a
property that is encumbered by a mortgage. If, for instance, an individual
purchases a building by paying some cash and also assumes the mortgage
encumbering the property, the sale price of the property includes the amount of
the cash received and the amount remaining on the mortgage assumed; see Loyens,
at paras. 31 and 33. The vendor’s proceeds of disposition for tax purposes
would thus include both amounts; see Lord Elgin Hotel Ltd. v. Minister of
National Revenue (1964), 64 D.T.C. 637 (T.A.B.), at paras. 11-12.

[27]The Minister submits that a forest tenure with
reforestation obligations that have arisen under Alberta law from past
harvesting is analogous to property encumbered by a mortgage. According to the
Minister, upon sale of the forest tenure, the purchaser’s assumption of
reforestation obligations, like the assumption of a mortgage, forms part of the
sale price and must be included in the vendor’s proceeds of disposition.

[28]DMI, supported by the industry interveners,
submits that the analogy to a mortgage is misplaced. In their view, a forest
tenure with reforestation obligations that have arisen from past harvesting is
better analogized to property that is in need of repair. The need for repairs
has the effect of depressing the property’s value. If property in need of
repair is sold, the purchaser’s assumption of the cost of repairs does not form
an additional part of the sale price of the property. And, as the Minister
acknowledged at the oral hearing, the vendor would not be required to include
in its proceeds of disposition an amount to reflect the estimated repair costs
assumed by the purchaser. This would be true even if the parties attributed a
value to the cost of those repairs in their contract and even if the repairs
were required by law; see M. Colborne and S. Suarez, “Timber! Consequences
of Assuming Reforestation Obligations” (2012), 60 Can. Tax J. 137, at p.
142.

[29]I agree with Mainville J.A., DMI and the
industry interveners that the assumed reforestation obligations are not
appropriately characterized as the assumption of an existing debt of the vendor
that forms part of the sale price of the property. The obligations — much
like needed repairs to property — are a future cost embedded in the forest
tenure that serves to depress the tenure’s value at the time of sale. This is
different from a mortgage, which, as I explain below, does not affect the value
of the property it encumbers.

[30]In this case, the reforestation obligations are
embedded in the forest tenure by reason of the policy and practice of Alberta.
As described above, Alberta law provides that a forest tenure may be
transferred only with the consent of the appropriate provincial official; see
the Forests Act, ss. 16(3) and 28(2), and The Timber Management
Regulations, s. 154. As the trial judge found (para. 26) and Alberta has
affirmed before this Court (factum, at paras. 24-26), “the Province of Alberta
will not approve of a transfer of the forest tenures, unless a purchaser
assumes the reforestation liability”. That is, “the situation in Alberta is
that the Province effectively forces the purchaser to assume the reforestation
liability: no assumption — no transfer of forest tenures”: trial reasons, at para.
26. Further, Alberta takes the position that, after an assignment has been
approved by the province, the vendor is absolved of all liability for the
reforestation obligations.

[31]The effect of Alberta’s scheme is to embed the
reforestation obligations into the forest tenure, such that the obligations
cannot be severed from the property itself. As such, the reforestation
obligations are simply a future cost tied to the tenure that depresses the value
of the tenure. A prospective purchaser of the tenure would take into account
the income-earning potential of the tenure as well as the expected future costs
associated with ownership of the tenure. The existence of reforestation
obligations, a future cost that cannot be severed from the tenure, would
decrease the amount such a prospective purchaser would be willing to pay; see
J. Frankovic, “Supreme Court to Hear Daishowa Appeal — Back to Basics on
Basis and Proceeds” (July 12, 2012), CCH Tax Topics No. 1205, at pp.
2-3. Here, for instance, the record establishes that Tolko valued the High
Level Division’s forest tenure at $31 million less the $11 million estimated
cost of future reforestation obligations. The forest tenure thus had a value
of $20 million. To include the full $31 million in DMI’s proceeds of
disposition would disregard the fact that DMI did not have $31 million of value
to sell. Under no circumstances could DMI have received $31 million for the
forest tenure.

[32]This distinguishes the reforestation obligations
tied to a forest tenure from a mortgage, which does not affect the value of the
property it encumbers. For instance, a property worth $31 million that is
encumbered by a mortgage of $11 million, despite the mortgage, still has a value
of $31 million. The vendor of such a property could obtain $31 million for it
and then pay off the mortgage. Alternatively, the vendor could obtain $20
million and have the purchaser assume the mortgage. In either case, it makes
sense for the vendor’s proceeds of disposition to equal the full $31 million
because that is the value of the asset being sold.

[33]Parenthetically, I note that it is true that in
some circumstances, the terms of a mortgage might have an impact on the
sale price of the property it encumbers. If, for instance, property is
encumbered by a mortgage with a very favourable interest rate, it will be more
attractive to purchasers who can assume such a mortgage and such purchasers
will be prepared to pay more on that account. However, in such circumstances,
the favourable interest rate has a separate value of its own to the purchaser
who can assume the mortgage. The interest rate does not affect the value of the
property. In any case, here, the Minister analogizes future reforestation costs
to the vendor’s indebtedness on a mortgage. As I have explained, the
vendor’s indebtedness does not affect the value of the property.

[34]At the oral hearing, the Minister’s argument was
that a forest tenure with reforestation obligations that have arisen from past
harvesting differs from property that must be repaired because DMI’s liability
for the reforestation obligations had “crystallized” by the time of the sale.
According to the Minister, the debt was “crystallized” because (1) at the time
DMI sold the forest tenure, it had already incurred obligations to reforest
land based on its past harvesting, and (2) it could not simply walk away from
those obligations. The Minister submits that in these circumstances, DMI
benefitted from the purchasers’ assumption of the reforestation obligations by
an amount equal to the estimated cost of the reforestation obligations.

[35]As Mr. Meghji, arguing for the Canadian
Association of Petroleum Producers (“CAPP”), explained at the oral hearing, the
problem with the Minister’s argument is that it presupposes that the
reforestation obligations are a distinct existing liability. Implicit in the
argument that DMI could not simply walk away from the reforestation obligations
is the proposition that the obligations were an existing indebtedness of DMI.
As I have explained above, the reforestation obligations were not a distinct
existing debt, like a mortgage, but were embedded in the tenure so as to be a
future cost associated with ownership of the tenure.

[36]I have concluded that Alberta’s regulatory
scheme, which prevents a vendor from selling a forest tenure without also
assigning the reforestation obligations that have arisen from past harvesting,
has the effect of embedding those reforestation obligations in the tenure
itself. In this appeal, CAPP submits that future obligations may be embedded
in a property right absent a legal requirement that precludes a vendor from
selling the property right without assigning the obligations. CAPP submits,
using the example of the mining of gas and oil, that statutory obligations to
reclaim mined land may be so physically connected to the process of mining
itself that the obligations cannot be separated from the property right. While
I need not decide that question on the record before me, I would certainly not
foreclose the possibility that obligations associated with a property right
could be embedded in that property right without there being a statute,
regulation or government policy that expressly restricts a vendor from selling
the property right without assigning those obligations to the purchaser.

[37]In sum, the reforestation obligations imposed by
Alberta law on DMI’s forest tenures are embedded in those tenures and, as such,
are future expenses tied to ownership of the property. They are not a
liability that can be separated from the forest tenure, the assumption of which
would form part of the sale price of the tenure. I would therefore reject the
Minister’s argument that the purchasers’ assumption of the reforestation
obligations had to be added to DMI’s proceeds of disposition for income tax
purposes.

(2) Contingent Liabilities

[38]DMI has also argued that it should not have been
required to add the reforestation obligations to its proceeds of disposition because
the obligations were a contingent liability.

[39]A contingent liability is “a liability which
depends for its existence upon an event which may or may not happen”: Canada
v.McLarty, 2008 SCC 26, [2008] 2 S.C.R. 79, at para. 17, quoting Winter
v. Inland Revenue Commissioners, [1963] A.C. 235 (H.L.), at p. 262. This
Court has recognized that the contingent nature of a liability may have
implications on the tax treatment of the liability. In McLarty, for
instance, this Court recognized that, although a taxpayer generally incurs an
expense when he has a legal obligation to pay a sum of money, no expense is
incurred for tax purposes if the liability is contingent: paras. 14-16. In Mandel
v. The Queen, [1980] 1 S.C.R. 318, aff’g [1979] 1 F.C. 560, this Court
affirmed the Federal Court of Appeal’s determination that a taxpayer who
purchases a capital asset may not include in his capital cost a liability to
the vendor if the liability is contingent.

[40]However, DMI’s argument that the reforestation
obligations should not be included in its proceeds of disposition because they
are a “contingent liability” is misplaced and appears to have caused some
confusion in the courts below. The argument is problematic because, in
focusing on whether the reforestation obligations are contingent or absolute,
it implicitly accepts that the cost of reforestation is a liability of the
vendor that is not embedded in the forest tenure and would constitute proceeds
of disposition but for the contingent nature of the liability; see
Frankovic, at p. 4. This implicit assumption is incorrect. As I have
explained above, the cost of reforestation is not a distinct existing liability
of the vendor. The assumption of the cost of reforestation would thus be
excluded from proceeds of disposition independent of whether the cost is
absolute or contingent. Using the example of the sale of a building in need of
repair, the purchaser’s assumption of the future cost of repairing the building
is not part of the sale price of the building regardless of whether the
purchaser is certain he will have to spend a specific amount on repairs in the
future — such that the cost is absolute — or the requirement for repairs
depends on some future event — such that the cost is contingent. The certainty
or likelihood of the cost of repairs may, of course, affect the sale price by
affecting the amount the purchaser is willing to pay for the building. It does
not, however, affect whether the cost of repairs is part of the proceeds of
disposition. The same is true of the reforestation obligations embedded in a
forest tenure.

(3) Avoidance of Asymmetrical Tax
Treatment

[41]The approach advanced by the Minister would lead
to asymmetry between the vendor’s proceeds of disposition and the purchaser’s
adjusted cost base at the time a forest tenure is acquired. The Minister’s
position is that the purchaser’s adjusted cost base upon acquiring a forest
tenure does not include the estimated reforestation obligations assumed.
Notwithstanding that, the Minister would have the vendor’s proceeds of
disposition include the amount paid to the vendor plus an additional amount for
the estimated future reforestation obligations assumed by the purchaser. The
effect would be to tax the vendor as if the reforestation obligations assumed
by the purchaser were part of the sale price, but to tax the purchaser as if
the reforestation obligations it assumed were not part of the sale price; see
P. W. Hogg, J. E. Magee and J. Li, Principles of Canadian Income Tax Law
(7th ed. 2010), at p. 322, which explains that a taxpayer’s adjusted cost base
generally includes the purchase price of the property, as well as any expenses
or fees associated with the acquisition of the property.

[42]Counsel for the Minister acknowledged this
asymmetry at the oral hearing. Under the Minister’s approach, the sale of the
High Level Division to Tolko would have resulted in taxable proceeds of $31
million for DMI ($20 million received plus $11 million in assumed reforestation
obligations). However, Tolko’s adjusted cost base would be $20 million (just
the amount paid). The Minister’s asymmetrical approach means that if Tolko
sold the forest tenure to a new purchaser the very next day, Tolko would be
assessed taxable proceeds of $31 million (the amount received plus the
assumption of the future reforestation costs). That is, Tolko would be
assessed $11 million of taxable income, despite in no way receiving such
additional income.

[43]The conclusion I have reached — that a
purchaser’s assumption of reforestation obligations does not form part of the
vendor’s proceeds of disposition — avoids this asymmetry. Although not
dispositive, as Mainville J.A. recognized in his dissent, an interpretation of
the Actthat promotes symmetry and fairness through a harmonious taxation
scheme is to be preferred over an interpretation which promotes neither value.

B. Whether it Makes Any Difference That the Contracting
Parties Agreed to a Specific Amount of the Future Reforestation Obligations

[44]The Minister reassessed DMI with respect to the
Tolko sale using the $11 million estimated cost of the reforestation
obligations included in the sale agreement and reassessed DMI with respect to
the Seehta sale using DMI’s internal accounting estimates. The trial judge’s
determination of DMI’s tax liability relied upon both of those estimates.
According to the majority of the Court of Appeal, whether reforestation costs
should be included in proceeds of disposition turns on whether the contracting
parties agreed to an estimated future cost. It thus upheld the Minister’s
reassessment in the Tolko sale, but remitted the matter to the trial judge to
determine whether there was an agreement as to the cost in the Seehta sale.

[45]In accordance with the analysis above, DMI’s
proceeds of disposition do not depend on whether the contracting parties agreed
to a specific estimate of the cost of those obligations in their sale
agreement. Any amount that the parties assigned to the reforestation
obligations in the sale agreement was simply a factor in determining the fair
market value of the forest tenures: I. J. Gamble, Taxation of Canadian Mining
(2004), c. 6.6.2, at pp. 6-14 to 6-15.

[46]It is also irrelevant that DMI estimated the
cost of future reforestation to compute its income for accounting purposes. Although
commercial and accounting principles allowed DMI to deduct reforestation
obligations on a yearly basis and add back to income the deducted amounts at
the time of the sale to provide a more accurate picture of its profit from year
to year, as I have explained above, the Income Tax Actdoes not permit
that approach; see V. Krishna, The Fundamentals of Canadian Income Tax
(9th ed. 2006), at pp. 171-72. This Court has recognized the distinct purposes
of financial accounting and income tax calculation: Canderel Ltd. v. Canada,
[1998] 1 S.C.R. 147, at para. 36. It would thus be an error to simply include
DMI’s accounting estimates in its proceeds of disposition.

VI. Conclusion

[47]DMI was not required to include in its taxable
proceeds of disposition an amount reflecting the future reforestation costs
assumed by Tolko and Seehta.

[48]The appeal is allowed with costs throughout to
DMI and the matter is remitted to the Minister for reassessment in accordance
with these reasons.

Appeal
allowed with costs throughout.

Solicitors for the
appellant: Wilson & Partners, Vancouver.

Solicitor for the
respondent: Attorney General of Canada, Vancouver.

Solicitors for the
intervener Her Majesty The Queen in Right of Alberta: Attorney
General of Alberta, Edmonton; Michael Sobkin, Ottawa.